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Tuesday, January 31, 2012

Preparing to be Competitive

Think back 30 or 35 years, or more if you like. To steal a term from Thomas Friedman, the world wasn't so flat then. There weren't as many global companies. The internet was thought to be a pipe dream of some MIT researchers. E-mail didn't exist for most of us. Fax machines existed, but most of us had never seen one. In short, we lived in a different world with a different economy.

The employment deal -- the written or unwritten agreements between employer and employee -- was very different as well. The concept of employees paying for benefits with pre-tax dollars was just coming into existence. As a result, most benefits were provided by the employer. Of course, there were fewer benefits, but many would argue that the ones we had were better.

In a fairly typical situation where an employee was starting a job with a large employer, here were some of the key components of the deal:

base pay

maybe a bonus, but base was certainly king

a pension plan designed so that the employee would spend his career with that company and have the opportunity to take normal retirement at age 65 or perhaps an earlier retirement as early as age 55

health care benefits for the employee and his family, paid by the employer

office visits

hospital care

major medical

vacation time

sick time

retiree medical benefits similar to those for active employees so that employees who retired early could live their retirements fairly worry-free

The world changed. Companies started to provide more and different benefits. They also started to charge employees for those benefits. And, in fact, the rate of increase in the employee cost of those benefits often increased far more rapidly than their pay. Companies began to understand the long-term commitment and cost of retiree medical plans. They started to go away. Similarly with pension plans, companies found that employees all wanted their 401(k) plans, but many of them just didn't get their pension plans.

And, the world continued to change. The newer age employee wanted different benefits. And, other companies provided for a far different deal. Take the auto industry, for example. When I was a kid, if your parents bought a car, they bought from GM, Ford, Chrysler, or American Motors, or maybe one of those funny looking Volkswagen Beetles. For the most part, they bought American. Global competition didn't really exist yet. So, those four American companies largely were competing with each other. Now, we have cars coming into the US from lots of different countries. Companies headquartered in those countries may pay less and provide fewer benefits. How do the US companies compete? Among other things, they have to consider lowering the cost of producing a car which means lowering the employee rewards structure.

Lots of industries that lead the economy now didn't even exist around 1980. Microsoft had been around for five years, but few people new of it. Apple was similar, although some of the geekier families had invested in the Apple II or its ill-fated brother, the Apple III, but most of the country just looked at it as a passing fad. How about Google? It wasn't even a dream.

So, when companies were designing or re-designing rewards programs in 1980, they didn't care about what Microsoft or Apple or Google were doing, but what GM was doing may have made a difference.

Fast forward to 2012. If you are in corporate HR, or if even if you just work for a company that provides pay and benefits, you probably know something about your company's rewards program. Perhaps it works well today, perhaps it doesn't.

But, will it work tomorrow?

We see lots of surveys. Heads of HR always want to know what their competitor companies have? How much are they providing? How much are they spending? Perhaps they want to be near the median, or a little above, or a little below.

Shouldn't the questions really look more like this?

Who will our competitors be in 5-10 years?

What will they be providing in 5-10 years?

What will it take to compete for talent in 5-10 years?

Will attraction be important?

Will retention be important?

If you were analyzing a large company and that company didn't have a long-range plan, you would laugh at it. The CEO has one. The COO has one. Surely, the CFO has financial forecasts of at least the next five years. Does the head of HR?

Sadly, the answer is probably not. And, it would not surprise me if maybe without knowing it, this is one reason that Finance often looks askance at HR.

So, HR people, isn't it time to look into the future to see what the winning HR strategies might be. Your employees of the future would tell you "just saying."

Disclaimer

The opinions expressed in this blog are not those of anyone but the author of the particular post or comment. Nothing in it is to be construed as the opinion of any employer unless specifically disclosed as such.

The express intent of this blog is to provide no investment advice of any type. While asset allocation and theory may be discussed in a research or academic context, no advice as to specific investments or strategies is intended or permitted.